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Rajan:The Third Pillar: How Markets and the State Leave the Community Behind

Criticizing Modern Monetary Theory, you wrote that “it is not enough for a government to ensure that it can afford to make its interest payments; it also must show that it and its successors can repay the principal,”

I am not sure we need to keep sending checks to households that have not been hurt by the pandemic. Given the quantum of pent-up savings, I agree with Larry Summers that additional untargeted transfers – which add to the public debt – are unlikely to be useful.

PS: At a 2005 gathering of leading economists in Jackson Hole, Wyoming, you warned that unsustainable banking practices and risky financial instruments could lead to economic collapse. With your audience’s mood buoyed by rising property prices, your paper was met with a chilly reception. But, less than three years later, your warnings proved prescient. Have economists’ risk perceptions improved since then? What actions could improve them further?

RGR: Much like generals, we economists learn how to fight the last war. Then we apply those lessons in the next war – sometimes inappropriately. Today, we have a better handle on risk-taking by banks than we did in 2005. But the risks have now moved elsewhere, not least because we have taken action to limit those related to banking. After the COVID-19 crisis, we will need to examine policies that lead to increased leverage, especially in, and by, entities outside the formal banking system.

PS: In your 2019 book, The Third Pillar: How Markets and the State Leave the Community Behind, you write that “society has to find a new equilibrium,”

Raghuram G. Rajan, a former governor of the Reserve Bank of India and a professor at the Universof Chicago Booth School of Business.

Project Syndicate 26 January 2021


Raghuram Rajan, one of the few economists to see the financial crisis coming, wins the Financial Times and Goldman Sachs Business Book of the Year award

FT 28/10/2010


The monetary financing advocated by MMT is just smoke and mirrors


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